For most taxpayers, tax-filing season is over. Tax scams, however, never seem to end.
It’s true that tax-oriented scams are at their peak during the January-to-April filing season. But criminals use tax issues — and taxpayers’ concerns about their taxes — to dupe unsuspecting filers year round.
Every year, the IRS tracks the multitude of schemes and compiles a list of the 12 most egregious tax-related scams.
Some scam artists come up with patently false schemes to wheedle personal information and money from unsuspecting taxpayers. Others take real tax breaks, or portions of legal write-offs, and illegally apply them.
Eleven of the scams are making a repeat appearance on this year’s warning list, including the criminals’ perennial favorite, phishing. Other cons still making the rounds include frivolous tax arguments, retirement scams, misuse of trusts and improper charity deductions. And some folks can’t even trust their tax pros, with unscrupulous preparers once again making the annual list.
Each of these tax-oriented cons has serious consequences, not just for the perpetrators, but also for their victims.
If convicted of tax fraud or evasion, scam promoters face tax penalties, interest and criminal prosecution. And taxpayers who bought into a scam, even if they are unwitting victims, also could pay a steep tax price. They can end up owing not only the tax they thought they were avoiding, but also penalties and interest.
To help you avoid such unwanted tax consequences, be aware of these “dirty dozen” common, and potentially costly, tax scams.
|1.||Phishing||7.||Zero wage claims|
|2.||Filing false or misleading forms||8.||False tax abatement requests|
|3.||Frivolous tax arguments||9.||Return preparer fraud|
|4.||Fuel tax credit scams||10||Disguised corporate ownership|
|5.||Hiding income offshore||11.||Misuse of trusts|
|6.||Abusive retirement plans||12.||Improper charitable deductions|
More identity thieves than ever are using tax-themed fake e-mails to try to get personal financial information. Once they do, you can say goodbye to your good financial reputation and hello to a prolonged hassle to clean up the mess. These criminals use the information to empty victims’ bank accounts, run up credit card charges and apply for loans or credit in the victims’ names.
Some phishing e-mails falsely claim to come from the IRS, usually asking the recipient to send the personal data in a reply e-mail or to click on a link that takes the reader to a fake IRS Web page. Don’t fall for this fake bait. The IRS never uses e-mail to contact taxpayers about tax issues. Never respond to such a request and never follow any links in suspect e-mails. The only official IRS Web site is at www.irs.gov, and your safest move is to go there yourself directly if you have tax questions.
If you get such a solicitation, forward the e-mail to the IRS at email@example.com. And if you ever have any doubt as to whether any IRS contact is authentic, call (800) 829-1040 to confirm it.
2. Filing false or misleading forms
This is the lone new scam on the 2009 list. In these cases, scam artists file false or misleading returns to claim refunds to which they are not entitled.
One popular ploy is the filing of Form 1099-Original Issue Discount, or OID, by which false withholding credits are used to legitimize erroneous refund claims. Interest that you receive or that is credited to an account you own is taxable income and must be reported on your tax return. One type of such interest is from a bond, note or other long-term debt instrument that was originally issued for a lower price than its redemption price at maturity. This original issue discount is a form of such taxable interest. By crediting this false interest to the taxpayer, the scammer then claims an illegal refund using the falsely reported income.
This scam has evolved from an earlier phony “strawman” bank account scam. Here a fake account was created for a taxpayer, who then produced an information return, contending that the “strawman” account was used to pay for goods and services. They then falsely claimed the corresponding amount as withholding, which they then filed for in order to get the money “back” as a refund.
3. Frivolous tax arguments
This group of tax evasion techniques is probably the most notorious of scams. Over the years, tax avoidance promoters have advocated numerous false claims as to why individuals don’t have to file tax returns. They include the perennial claims that the 16th Amendment concerning congressional power to lay and collect income taxes was never ratified, and that wages are not income to newer arguments involving a misinterpretation of the 9th Amendment regarding objections to military spending and claims that taxes are owed only by persons with a fiduciary relationship to the United States.
Taxpayers do have the right to contest their tax liabilities in court, says the IRS, but no one has the right to disobey the law that allows the government to collect the taxes. The IRS regularly updates an online list of frivolous tax arguments. If a taxpayer files a tax return or makes a submission based on one of these positions, that person is subject to a $5,000 penalty.
4. Fuel tax credit scam
The credit is a legitimate tax break claimed by taxpayers such as farmers, who use fuel for off-highway business purposes. But in this scam, the IRS has received claims it says are unreasonable. Some filers, whose occupation or income level makes the claim suspect, are claiming the tax credit for nontaxable uses of fuel. The IRS recently added this credit claim to its list of frivolous tax arguments, meaning that a person found to fraudulently use it could face a $5,000 penalty.
5. Hiding income offshore
While hiding income in offshore accounts is nothing new when it comes to tax avoidance, the IRS has recently stepped up its efforts to combat this tax evasion technique.
Individuals continually try to avoid paying taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans, says the IRS. The IRS has also identified abusive offshore schemes including those that involve use of electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.
The IRS is conducting a two-pronged effort to stem these tax avoidance schemes. In addition to increased enforcement efforts, the IRS is offering those involved in such schemes a chance to come clean on their own. Those who come forward and pay back taxes, interest and a penalty, which in some cases may be reduced, will not face criminal prosecution for tax evasion.
6. Abusive retirement plans
Retirement accounts that offer tax advantages are prime scam targets. The IRS continues to uncover abuses in all types of retirement plan arrangements, including Roth IRAs. For instance, the IRS is looking for transactions that taxpayers are using to avoid the limitations on Roth contributions, as well as early-distribution transactions that are not properly reported.
Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs, or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed. The IRS also reports the use of limited liability companies to engage in activity that is considered prohibited.
7. Zero wage claims
This scam has been around for years and is still going strong. Its hook: No income means no taxes due. So how do you get to the zero income level? By attaching to your return either a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 that shows little or no wages or other income. Often, the taxpayer includes a statement that the information is in rebuttal to prior data the IRS received. In support of these purported corrections, the filer might cite “statutory language” on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation.
Sure, every year taxpayers don’t get their W-2 statements from employers and have to submit replacement forms. Similarly, companies often send their workers corrected year-end statements when original information is wrong. But you can be very sure that the IRS will look carefully at any new statements and try to track down substantiation for the changes. Try to slip bogus documents past the agency, and you’ll hear from an auditor.
8. False requests for abatement
This scam uses a real tax document, Form 843, but rests on a faulty interpretation of the Internal Revenue Code.
The official Form 843, Claim for Refund and Request for Abatement, is legitimately used by taxpayers in cases where they have not filed a return and the IRS has instead filed one for them using its Substitute for Return, or SFR, program. This happens when the IRS computer matching program discovers that it has a 1099 or other tax statement for a taxpayer but no actual return from that taxpayer. The IRS then creates a substitute return for the nonfiler. The SFR process, however, does not allow any deductions on the income that the agency discovered via statement matching. So filers for whom an SFR was created often produce evidence of deductions in connection with that income and see an abatement of some of the taxes.
That is legitimate; but the IRS says it has seen an increase in the incorrect use of the reason “Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service” being claimed on abatement requests. This and other reasons that do not apply in connection with an abatement request, says the IRS, are scams.
9. Return preparer fraud
It’s no secret criminals are out there looking to take advantage of taxpayers. But it’s even more distressing when the person you trust to help you file your taxes turns out to be dishonest.
Every year, the IRS encounters unscrupulous tax return preparers who make money at the expense of their customers. Often they divert a portion of the taxpayer’s refund to themselves. Even when the action isn’t that blatant, the IRS warns that unethical preparers tend to charge inflated fees for their services and increase their clientele by advertising guaranteed larger refunds.
While a tax preparer who is convicted of tax crimes can be sent to jail, their clients also pay a price. No matter who prepares your return, you are ultimately responsible for all of the information on the 1040. When the fraud is discovered, you’ll owe not only the back taxes, but also interest and penalty charges. This swindle underscores the need for all taxpayers to choose carefully when hiring a tax preparer.
10. Disguised corporate ownership
The IRS says that domestic shell corporations are being formed and operated in certain states in an effort to conceal business ownership or financial activity. In this scheme, these anonymous entities are being used to facilitate long-standing tax evasion efforts, such as underreporting of income, nonfiling of tax returns, money laundering and other financial crimes. The IRS is working with state authorities to identify abusive entities and bring their owners into compliance.
11. Misuse of trusts
Trusts are a legitimate and frequently used financial planning tool where a taxpayer’s money is controlled and managed by an independent trustee. In many cases, they do offer tax advantages. But the urge to cut taxes, combined with insufficient understanding of IRS trust requirements, often makes taxpayers easy marks for self-styled experts promising to reduce or eliminate taxes through illegal trust investments.
In abusive trust transactions, taxpayers transfer assets into trusts but don’t see any of the advertised benefits, such as a reduction of income subject to tax, deductions for personal expenses paid by the trust and a decrease in gift or estate taxes. The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses.
Don’t simply take any tax trust sales pitch at face value. Before entering any trust arrangements, seek the advice of a trusted tax professional.
12. Improper charitable deductions
The abuse of charitable organizations and taxpayer deductions to improperly shield income or assets from taxation remains on the latest tax scam list this year.
The IRS says it continues to observe arrangements where a taxpayer moves assets or income to a tax-exempt supporting organization or a donor-advised fund, but maintains control over the assets or income. The filer then claims a tax deduction for the gift without actually providing a benefit to the charity.
In other cases, the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.
Beware or be ready to pay
It’s bad enough that scam victims, believing promises of lower tax bills, end up losing cash. But even worse, they subsequently find themselves in deeper debt to the IRS. The reason: Even if you are duped, federal law requires you pay your rightful taxes plus any penalty charges and back interest that accrued because of your use of dubious tax-relief techniques.
IRS offices across the country are keeping tabs on these Dirty Dozen tax scams but warn that more cons are out there. Some schemes might not be as active as others, and the IRS says taxpayers should remain wary because old scams often resurface or evolve. And the absence of a particular scheme from the annual blatant scam list should not be taken as an indication that the IRS is unaware of it or not taking steps to counter it.
To make sure, if you encounter any of these schemes, or are approached with a new one, the IRS wants to know. Report suspected tax fraud by calling (800) 829-1040.
And remember: If you are ever offered a “surefire” tax-saving opportunity, it never hurts to be a little skeptical.